The central bank next week will unveil measures for further liberalisation of the foreign-exchange market, facilitating greater outflows to help ease pressure on the baht.
"2009 was a challenging year … Risks persist, though, on fragile global economic recovery," Bank of Thailand Governor Tarisa Watanagase told a BOT-sponsored conference yesterday.
"Capital flows will be more volatile this year. Funds will flow to countries that witness fast recovery. We saw the signals that pressured the baht late last year. Excessive inflows can lead to asset bubbles if we're not careful."
Aside from liberalisation, which will also support Thai companies' relocation of labour-intensive activities elsewhere, currency-hedging tools will be offered to entrepreneurs, in order to ensure reasonable cost.
Last year, Thailand welcomed net capital inflows of US$22.6 billion (Bt748 billion): $20 billion as trade surplus, $1.5 billion through the bond market and $1.1 billion through the stock market. Inflows boosted foreign reserves, which stood at $134.7 billion as of last November, up from $85.1 billion at the end of 2007.
While the gate is wide open for inflows, the BOT limits outflows at $30 billion. That ceiling is considered too low, as local companies are looking outward for expansion, while many funds are launched for investment abroad.
This year, Tarisa expects net import-export inflows of $10 billion, with an increase in inflows to the bond and stock markets.
"We must not have too much liquidity for too long. When we see early signs of a bubble, we need early action to pre-empt it," she said.
Just as Tarisa defended the managed-float scheme, which allows central-bank intervention in the currency market, the baht yesterday declined to its lowest level in two weeks, slightly above 33 to the US dollar, on speculation the BOT would stem the appreciation.
The baht has strengthened 0.7 per cent against the dollar this year, reaching its highest level since June 2008 earlier this month.
Further liberalisation is one of three major policies of the central bank this year. Aside from further liberalisation of the financial sector so that they play a more important role in boosting the economy, Tarisa focused on rolling back stimulus policies.
She insisted that since the economy was recovering, with a growth forecast of 3.3-5.3 per cent, there was a growing need to wind down fiscal and monetary relaxation.
However, Tarisa said that needed to be done at an appropriate time. If done too soon, it will affect the pace of economic recovery. On the other hand, if the policy is continued for too long, inflation could rise and lead to bubbles, thus threatening economic stability. For instance, the cost-of-living measures are not as necessary now as they were in mid-2008, when they were first launched to mitigate the skyrocketing inflationary pressure.
For economic stability, the governor emphasised the need for fiscal reform. With its fiscal strength, the government can step in to revive the economy in time. Yet since 80 per cent of the annual budget is for fixed expenses, this poses a structural problem, while only one-sixth of the population is in the taxation system. Tarisa supports the reform, which could see some taxes lowered and some increased, as well as some new measures.
She sees the need to address factors that affect Thailand's competitiveness, as Thai business can no longer rely on labour-intensive activities and a weak baht.
More research and development must be encouraged to boost productivity, particularly in the agricultural sector. For example, Thailand's rice yield is as low as 430 tonne per rai, against an average of 700 tonnes per rai in Vietnam, Indonesia and the Philippines.
Tarisa also urged all parties to find a solution to the political impasse, which has been a significant factor dampening the investment climate. Slow government investment in infrastructure is also affecting the Kingdom's competitiveness.
"World economic growth is lower, and international trade will become fiercer. It will be a challenge to raise Thailand's status in the global arena. It's everyone's mission. The chance of success is nil without cooperation," she said.
